Hi Do, Here are Todd’s latest fun picks to take your financial skills to the next level... Today's educational resources are pure gold.
Each has the power to single-handedly Improve your financial outcome in life by correcting a dangerous half-truth promoted by conventional financial advice.
Let me be clear - much of conventional financial advice is valid and useful. We don't want to throw out the baby with the bath water.
However, it's critically important to separate truth from fiction because financial mistakes can be expensive. And false information in the form of financial half-truths can result in bad decisions that cost you money.
For example, our first resource debunks the "stocks for the long run" myth.
You've heard it some many times that it probably seems like a fact in your mind.
The story is that stocks are safe if held long-term because losses are rare, and gains are virtually assured, at 20-30 year horizons.
Well, buckle in because the first resource today will prove why that's not true: When reading today's first resource, notice how conventional wisdom is based on limited data, primarily from the U.S. during the unrepresentative time when it was the economic prom queen of the world. As long as you limit the analysis to the data it's based on, then you come to the same (false) conclusion. However, when you expand the dataset to include all developed countries from 1841-2019 and eliminate hindsight bias from the data, then a much riskier and contradictory conclusion emerges. Some U.S. investors might be tempted to ignore the expanded data as irrelevant, but can you really afford to bet your financial future on the premise that the United States will remain exceptional and not produce results comparable to the rest of the developed world? Furthermore, why did Jeremy Siegel, the author of "Stocks for the Long Run" that popularized this half-truth, eliminate the chapter from recent editions of his book that showed how a tactical risk management overlay to stocks (which completely negated the long-term hold assumption) actually outperformed buy and hold on a risk-adjusted basis? Where is the contradictory discussion showing multi-decade periods where bonds outperformed stocks, but with much less risk? Where is the analyses showing long-term stock performance dependent on valuation levels at the beginning of the holding period, which would bring essential nuance to all of the research? Clearly, there's a lot more to this half-truth than commonly understood, yet tons of good people have bet their entire financial future on this half-baked slogan.
The problem is Level 1 thinking is much easier to popularize, so it spreads wide and deep, even when it's wrong: Level 1 is simple enough for everyone to understand, and it's just close to enough to reality to pass the smell test. The simplicity and clear basis for support allows widespread dissemination to become conventional wisdom. Level 2 is dynamic and nuanced. It requires a deeper examination of additional data and nonlinear thinking processes to understand, but it's worth the effort because it better represents reality, which then produces more reliable results. Stocks for the long run is Level 1. It has worked great in recent decades, but that doesn't mean you can rely on it going forward now that epochal change is here.
Once you eliminate data bias and adjust for contradictory facts, the evidence becomes clear that passively owning a stock portfolio is far, far riskier than you've been told.
I hope this insight helps you protect your portfolio (the solution I recommend is here...) during this new investment epoch we entered at the end of 2021.
Moving on... our second resource today takes your retirement income strategy from Level 1 to Level 2.
The conventional financial wisdom is well-represented by the "4% Rule." Some authors adjust it to 3% based on interest rates and market valuations, and others apply Monte-Carlo analyses. But in the end, these are distinctions without a difference because the underlying assumptions that determine the outcome are consistent (see my bestselling book How Much Money Do I Need to Retire for more details).
So let's take the retirement income discussion a cut deeper to reveal Level 2: The 4% Rule broadly fails when applied to international data. Again, it's a special case example that is only applicable to the U.S. during it's reign as the economic prom queen of the world. Furthermore, one small change to the investment assumption requiring passive index asset allocation (buy and hold) by replacing it with dynamic allocation strategies gives you double the safe withdrawal rate. Hmmm, what does that tell you about the importance of assumptions and risk management? Sequence of returns risk, which is the primary reason the safe withdrawal rate is less than half the expected return from the same portfolio, results mostly from the first few years of retirement investment returns. Shocking results occur when you actively manage that risk. Another static assumption of the conventional model - automatically increasing spending each year for inflation - can be replaced with dynamic spending strategies that better fit real-world investor actions and greatly increases safety while also increasing the amount that can be safely withdrawn. So whether it's investment strategy with stocks for the long run or retirement strategy with safe withdrawal rates, the truth is far more nuanced than conventional financial advice would lead you to believe.
And that difference isn't just for financial geeks playing cute math games with data.
Both of today's resources pack enough actionable value to materially change your financial outcome in life. That's a big deal!
Each has profound real-world implications for every person who would eventually like to live off their portfolio (which is every reader of this newsletter!).
So if you get value from today's resources, then you'll love my premium products specifically designed to take your financial strategy straight to Level 2. (In fact, that's why I created them!) My Expectancy Wealth Planning course is built from the ground up to replace conventional Level 1 financial advice with Level 2 advanced wealth planning. It applies conventional financial wisdom where accurate, and it replaces everything else with the required Level 2 insights. The result is a cohesive, actionable plan for your wealth. After completing this course, you'll be a Level 2 advanced wealth builder. The improved actions you take based on that advanced understanding should more than pay for the course many times over, making it a revenue producer instead of an expense. Buy it here. And my recommended resource for managing your portfolio risk using tactical asset allocation gives you Level 2 investment strategy for your paper asset portfolio. Again, the value proposition exceeds many times the cost. Yes, it takes a little more effort to apply Level 2 knowledge to your financial strategy. Today's newsletter resources are not easy reads.
And the paid resources recommended above cost a little and will take some time. But nothing worth having is for free.
Also, I guarantee it takes a lot less effort to move your financial strategy to Level 2 than it takes to produce the same results with Level 1 thinking.
The decision should be obvious...
Using data from developed markets around the world from 1841-2019, the authors both support conventional wisdom where accurate, and turn it upside down where it's not. Did you know the probability of losing money on a 20 year holding period is 15.5%, or roughly 1 in 6? 30 years probability of loss is 12.1%. And these are "optimistic" numbers because they don't include commissions and other expenses, making reality even worse. Even more shocking is the substantial dispersion of real (inflation adjusted) outcomes faced by long-term stock investors. In fact, the longer the holding the period, the greater the dispersion in results (contrary to conventional wisdom). My recommended Level 2 investment strategy resource here can shorten the expected time horizon for positive returns all the way down to 3 years or less, which changes everything about wealth planning and retirement strategy. Take action here... I don't like the name of this article, but I loved the article. Once you get past the "chaos" mathematics application, the rest of the article is pure gold filled with real-world application. In a nutshell, the mathematics of wealth accumulation and decumulation (retirement income planning) are totally different. The mathematics of adding to your portfolio during adversity versus drawing down the portfolio to pay for lifestyle expenses during the same period of adversity are night-and-day different. You CANNOT - I repeat, CANNOT - use strategies proven valid for the accumulation stage during the decumulation stage. That's a Level 1 mistake that can be disastrous to your wealth. My Expectancy Wealth Planning course provides many more insights that extend well beyond what this article provides, so if you get value from this article then make sure to join this community of smart wealth builders (which, BTW, is where this article was referred from! Thank you, Nate!)
Onward and upward!
Todd Tresidder
Take Action Now So You Can Grow Your Wealth During Epochal Change: This investment software solution includes two of Todd's top investment systems. You'll learn the smart, proven way to manage portfolio risk during epochal change. Once you understand it, you'll wonder why you tolerated the unmanaged risk in your old "buy and hold" investment strategy. My Expectancy Wealth Planning group coaching program shows you how to maximize the expected growth of your wealth in every market condition regardless of epochal change. My students were prospering during the good times, and they're still prospering during this adversity. Join this smart community of active wealth builders to secure your financial future. |
